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December 13, 2012

Gen X Drew Financial Short Stick: Financial Finesse

Life cycle, timing works to both millennials and boomers’ benefit but to Gen X’s disadvantage

Financial Finesse says Gen Xers have a lot to learn about personal finance and retirement savings.

While different generations have similar vulnerabilities and priorities, members of Generation X are generally worse off than millennials and both late and early boomers, says a recent generational research study published by financial education group Financial Finesse Inc.

For Gen Xers, who are between 30 and 44 years old, part of the problem is just bad luck. Many members of Gen X started working and saving too late to take advantage of the booming market, and bought houses just in time to get hit by the housing crash, according to the Financial Finesse study released on Dec. 6.

Boomers, on the other hand, had enough time to build a cushion and grow equity to protect themselves, while younger millennials have enough time to grow their assets as they’re just starting out.

Generation X Has Cash Flow Issues

Financial Finesse found Gen X to be the least financially stable. They are less likely than millennials or boomers to have a handle on cash flow or maintain an emergency cash fund. Less than half regularly pay off credit card debt in full, and just over half are comfortable with their debt level. They also scored the lowest on Financial Finesse’s wellness score, with a score of 4.6.

A quarter of respondents between ages 30 and 44 have an annual income of between $35,000 and $60,000, and 22% make between $100,000 and $150,000. Most respondents in this age group are married with children under 18, and 67% own their home.

“Part of it is due to life cycle,” Erik Carter, resident financial planner at Financial Finesse and a member of the firm’s Think Tank, told AdvisorOne on Thursday. “They’re at an age where they have a mortgage and children — we’ve seen a big correlation between children and financial stress.”

Timing is another factor in Gen X’s relative financial straits. “They missed the run-up in stocks,” Carter said, “and the last 10 to 12 years in general have not been good.”

Similarly, the housing crash hit Gen X harder than other age groups, the report pointed out. They were more likely to own homes than millennials, but less likely to have the same level of equity that boomers did. They are also more likely to have young children than any other age group, which contributes to their financial stress.

Gen X is recovering from the recession, but they’re still behind, Carter said. He referred to data from the Pew Research Center that found 35- to 44-year-olds are 44% poorer than their older counterparts were at that age.

Many of the same tech tools used by millennials could help members of Gen X focus on tracking expenses and setting budgets, he added.

On the positive side, Gen X is more focused on retirement than younger adults. Financial Finesse found 65% of respondents say retirement planning is their top priority. This may come from a general sense of caution shared by the generation. The report cited Greg Hammill, former director of intern and student programs at Fairleigh Dickinson University's Silberman College of Business, who wrote in an article for FDU Magazine that members of Gen X tend to be conservative when it comes to finances.

Debt, it seems, is what’s holding Gen X back, more than an inability to save or a misalignment of priorities. Nearly 90% of Gen X workers are saving in their employer’s plan, and three-quarters are using their company match. Twenty-two percent contribute to an IRA, less than the number of millennials who do so. However, as mentioned before, almost half are uncomfortable with their level of debt.

Millennials Have Time and Technology

Naturally, millennials have the lowest median income, but Financial Finesse found that investors in their 20s have a better grasp of money management than many of their older counterparts. Twenty-eight percent are making between $35,000 and $60,000 a year, and nearly three-quarters say they have a handle on cash flow while 88% are paying their bills on time every month.

Over half of millennials surveyed said getting out of debt is one of their top priorities and 62% are working toward that end by paying off their credit card balance in full regularly.

Time is on millennials’ side, but technology is an important part of their story as well. Financial Finesse noted the impact of coupon sites like LivingSocial and Groupon on millennials’ budgets. Technology has had a subtle impact on their retirement plans as well. Half of millenials have been automatically enrolled into their company retirement plan and almost the same percentage are entirely in a target date fund.

There’s a dark stain on this rosy picture, however. On a scale of one to 10, Financial Finesse gave millennials a score of only 4.9 for financial wellness, taking into account age and income for a particular generation. A score between 3 and 4.9 indicates a need for more basic information.

Thirty percent of adults under 34 with full-time jobs have returned to their parents’ homes in the last few years. Furthermore, millennials need to turn their attention to long-term planning, Carter said.

While 83% are contributing to their employer-sponsored retirement plan, only 74% are contributing enough to qualify for the employer match. Only 29% have estimated how much they’ll need for retirement and just 17% say they’re on track to replace 80% of their income.

“For every age group, retirement is their biggest vulnerability,” Carter said. “Millennials are the only ones who aren’t aware of it. The challenge could be bigger for younger groups and the track could be worse than it looks now.”

Carter noted that the report only looked at respondents who were employed, and “one of the biggest hits for millennials has been finding a job.”

Outside of their employer-sponsored plans, just over a quarter of millennials are contributing to an IRA.

While over half have made investing or getting out of debt priorities, their biggest priority is managing cash flow. One advantage they have, Carter said, is that many are coming out of college, where they likely weren’t spending much. “It’s easier for them to maintain that frugality because they’re used to it.”

Millennial respondents reported an overall lack of confidence in investing. Less than 30% said they are confident about their allocations and 38% have taken a risk assessment. Nearly two-thirds say they have a general knowledge about investments.

Millennials need to see the impact that saving now could have on their retirement, Carter said. “The threat is that their retirement isn’t looking great. If they start saving now and saving aggressively, they could be in better shape than even the older generations.”

Late Boomers Face Family Demands

Late boomers, those who are between 45 and 54, show remarkable improvements over Gen X. Their income is higher, with 46% earning between $75,000 and $150,000 per year, and 84% own their home. They’re also more likely to contribute to educational savings accounts and have adequate insurance for their needs. Their financial wellness score is an even 5, which Financial Finesse says indicates they are demonstrating some personal finance skills, though they still have significant gaps.

As this group nears retirement, those gaps begin to appear. Eighty-five percent of respondents said retirement planning was a priority, by far the group’s largest priority, but 75% don’t contribute to an IRA, 20% aren’t taking advantage of their company match and 5% aren’t contributing to their work plan at all.

Financial Finesse noted that late boomers’ propensity to plan for their families’ needs with insurance and educational funds could be a hindrance to their own financial safety. Even when they do focus on their own needs, their priorities are slightly askew. The report found late boomers aren’t doing enough to protect their wealth, noting that this age group should consider umbrella liability and long-term care insurance policies.

Only 40% of late boomers have young children, the report noted, so the group should see improvements in their day-to-day cash flow as older children leave home.

The report noted that the Medicare trust fund may be depleted in 2024, before most of this age group is able to take advantage of it, and Medicare and Social Security are also facing uncertain futures.

Early Boomers Still Unprepared for Retirement

At 5.6, early boomers between ages 55 and 64 have the highest financial wellness score from Financial Finesse, though in the same range as late boomers. Nearly a quarter earn between $100,000 and $150,000 and 15% make more than $150,000. These boomers are unlikely to have children at home, and consequently are better at cash management than other age groups.

Nearly 80% spend less than they make every month and almost all of them are paying bills on time. Nearly three-quarters have a comfortable level of debt.

Timing is also a factor in these older boomers’ successes. They were better able to save and invest in the stock market boom of the late 20th century, which helped “cushion the blow” of the recession, according to the report. Reform proposals regarding Medicare and Social Security tend to exempt people older than 55 from cuts, which is a political boon for this group, the report noted.

So near retirement, however, early boomers’ biggest vulnerability is being unprepared; 75% don’t know if they’re on track to retire. The two biggest things boomers need to keep in mind to protect their wealth is to plan for long-term care and to shift their portfolios to more conservative allocations, Carter said.

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